Policies aim to protect public
Morris News Service-Alaska
Tumbling stock prices, allegations of corporate fraud and the increasingly unpredictable world of international relations have many investors squirming and looking for safe havens from the storm.

But public dollars controlled by Kenai Peninsula municipalities appear to be relatively safe, thanks to policies that prevent the borough and its cities from investing in volatile equities.

While awaiting local spending decisions, tens of millions in tax revenues and state and federal appropriations are sunk instead into treasury bonds, corporate bonds and other conservative investments that earn modest but steady returns, even as the stock market freefalls.

That doesn't leave municipalities entirely unaffected by stock price fluctuations and changes in interest rates, but the type of investments made by local governments are designed to favor safety over rapid profits. Take, for instance, the investment policy of the Kenai Peninsula Borough.

"Most local governments, including the Kenai Peninsula Borough, have adopted investment policies limiting the type of investments we can make," said Jeff Sinz, finance director for the borough. "Ours has three primary goals: preservation of principal, meeting the cash-flow needs of the government and earning a market rate of return."

That pretty much eliminates putting public money into stock market equities, Sinz said.

Agencies include the Federal National Mortgage Association, a publicly owned government-sponsored corporation that buys mortgages from lenders and sells them to investors. Shares of the corporation sell on the New York Stock Exchange and are called by the nickname "Fannie Maes." Likewise, the borough may invest in "Freddie Macs," the nickname given the Federal Home Loan Mortgage Corp., which issues guaranteed mortgage-backed securities.

The borough currently owns no treasury bonds, Sinz said. About 41 percent of the roughly $108 million the borough had invested as of July 1 -- or about $44.3 million -- was in corporate medium-term notes, "bonds, in layman's terms," Sinz said.

Essentially, a bond amounts to a loan of borough money to the issuing corporation. The bond comes with a promise to return the principal at a certain date, plus a guaranteed rate of interest paid in installments over the time to maturity.

Another 41.5 percent of the borough's invested dollars, or about $44.8 million, was invested in agency securities as of July 1.

The remainder of the $108 million, almost $18.8 million, was in various kinds of "cash" accounts such as repurchase agreements, or REPOs, which put municipal money into a kind of short-term parking, where it earns a slightly higher rate of interest than if it sat in a bank savings account.

In Homer, Finance Director Dean Baugh puts city money into high-rated corporate paper (short-term, 90- to180-day investment vehicles similar to bonds), certificates of deposit and government agencies. The city's investment code dictates what he can and cannot invest in.

"I can invest up to three years. I've got money invested anywhere from daily (through the Alaska Municipal League's investment pool) out to the three years," Baugh said.

The city had about $10 million invested as of the end of June, Baugh said.

By comparison, the Alaska Permanent Fund Corp. invests not only in relatively safe securities, but also in equities (stocks), both domestic and foreign.

The borough and the cities have played it safe, by and large sheltered from the worst howling winds of the current financial climate. In one sense, that's fairly easy -- not only because the policy demands it, but also because there is little incentive to take risks, at least not the kind individual bond market players looking for short-term plays might take.

Still, risk isn't entirely eliminated. Where private corporations are concerned, there always exists a measure of uncertainty. Investing in securities issued by solid established companies reduces that uncertainty, to be sure.

But recently some apparently rock-solid firms have fallen on hard times -- in the case of two notables, Enron and WorldCom, because of allegedly fraudulent accounting practices. Bonds of those companies are trading at a fraction of their former worth. None of the governments on the Kenai Peninsula held any paper from those companies, however.

The latest borough budget included money to pay for a review the borough's investment policies and practices, something the borough does from time to time, Sinz said.

The San Francisco-based firm Callan Associates Inc., the primary consultant to the state's pension fund and the Alaska Permanent Fund Corp., will perform that function.

"The firm will look at the size of the portfolio and whether it is invested appropriately," Sinz said.